IL SERS Disability How to report?

[artp]

Taxpayer, single new client is covered by IL state retirement and benefits plan. In prior years he was paid what the state claimed was “non-occupational and temporary disability benefits” from SERS total $58,312.94 which is now recoverable per letter from SERS as the IRS has ruled the payments to be considered as occupational disability and fully excludable from gross income. The letter from SERS acknowledges receipt final payment of $31,406.42 representing the overpayment of non-occupational and temporary disability as reflected in the 1099R as follows:

Box 1 $31,4016.42

Box 2 $0

Box 5 $31,406.42

Box 7 code 1

So far, so good

The letter also states that the amount that the taxpayer REPAID to SERS in 2024 which pertained to the overpayment for those years was $20,461.13 and that amount may be taken as a deduction per IRS Pub 525. However, my understanding is that prior to 2017 the only way would be to take this as an itemized deduction but that is no longer available. So, the taxpayer is out of luck. Right? Any options?

 

What about the balance ($58,312.94 -31,406.42 = $26,906.52 - $20,461.13 = $6,441.39??

I attached a redacted copy of the letter from SERS.

 

Any thoughts would be appreciated

 

Art

Letter from SERS redacted.pdf

[jklcpa]

Check pub 525. With the repayment being over $3k, I think you can choose either to claim on Sch A line 16 or calculate a tax credit, whichever is better.

[artp]

Judy

Thanks for that reply. I looked in Pub 525 but under Repayments page 37 "In most cases you can claim a deduction or credit ONLY if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction." How does a repayment in connection with disability fit under that language? or am I miss understanding ?

Art

 

[jklcpa]

Keep reading further into that section about those repayments over $3K of income under a claim of right. Sec 1341.

https://www.law.cornell.edu/uscode/text/26/1341

I can't help you with the $6K difference in math.

What year is the 1099R for that now is -0- taxable?  I'm assuming this is for a closed year?

[artp]

Judy,

The 1099-R in the amount of $31,406.15 was for 2014.

Got further info from client. He received SSA-1099 for $41,637 for payments from years 2020, 2021, and 2022. He filed a workmen's compensation claim and received over $100,000 (did not get exact amount yet from client). So now if I understand correctly, the $58,312.94 is "recoverable" by SERS (per the language in their letter). So in summary client has paid income tax on $58,312.94 and has also paid back to SERS $58,312.94? 

Art

[jklcpa]

51 minutes ago, artp said:

Judy,

The 1099-R in the amount of $31,406.15 was for 2014.

Got further info from client. He received SSA-1099 for $41,637 for payments from years 2020, 2021, and 2022. He filed a workmen's compensation claim and received over $100,000 (did not get exact amount yet from client). So now if I understand correctly, the $58,312.94 is "recoverable" by SERS (per the language in their letter). So in summary client has paid income tax on $58,312.94 and has also paid back to SERS $58,312.94? 

Art

The client didn't pay tax on the full $58K because $31,406 of those payments were a return of his own funds, according to the letter and that is why the 2014 1099R shows -0- in box 2. That is the portion that he may not claim as a deduction now.

So the 2014 1099R that you have is only reporting the portion of the payments that were a return of his contributions. Is it possible that there was another 1099R in that year or other years where the taxable portions add up to the $26,902, and were taxes withheld?

I still do not know what the $6K difference represents, but is it possible that taxes withheld could account for the approx $6K if 20% Fed withheld and the remainder was state/local?  If it was taxes, he wouldn't now be entitled to claim that as a deduction for the repayment because that portion representing tax withholding would have been claimed as payments on the tax returns and either fully refunded or otherwise offset the tax liability for that year.   Hope that makes sense.

[artp]

Judy

Thanks for that reply.

So we are only dealing with the $20,461.43 and we can either take that as a itemized deduction on line 16 Sch A or try to identify which years that overpayment applied to and calculate the credit to take in 2024, right? Since we don't have a breakdown from SERS as to how much of that amount came from each year and client did not retain copies of his prior year returns it may be easiest to just take the deduction route. Client did indicate that he had less income in those years though he probably was in the 22 to 24% marginal tax rate. Does this sound reasonable?

[jklcpa]

16 minutes ago, artp said:

So we are only dealing with the $20,461.43 and we can either take that as a itemized deduction on line 16 Sch A or try to identify which years that overpayment applied to and calculate the credit to take in 2024, right?

Yes, correct.

 

16 minutes ago, artp said:

Since we don't have a breakdown from SERS as to how much of that amount came from each year and client did not retain copies of his prior year returns it may be easiest to just take the deduction route. Client did indicate that he had less income in those years though he probably was in the 22 to 24% marginal tax rate. Does this sound reasonable?

That would be easier, yes.

I would make sure that the client is aware of the 2 methods and that he is agreeing to deduction instead of the credit. I suppose it is reasonable because the information is unavailable.

 

[artp]

Judy,

The client is trying to get the data we need to calculate the credit..should get us a better result.

Thanks again Judy for all your help, very much appreciated.

Art